What is Bitcoin based on?
Unlike traditional currencies, Bitcoin is neither issued by a central bank nor supported by any government other than El Salvador. As a result, inflation rates, monetary policy, and economic growth indicators that traditionally affect the value of the currency do not apply to Bitcoin.
Bitcoin is based on a blockchain, which is a distributed digital storage file. A blockchain is a body that connects to data in units called blocks that contain information about each transaction, such as the buyer and seller, the time and date, and finally a unique identification code for each exchange.
When a block “goes up” on the blockchain, it becomes available to anyone who wants to look at it, giving it away as a public record for cryptocurrency transactions. Blockchain is decentralized, meaning that no single central entity such as a bank, financial authorities, or any other organization controls it. The digital blockchain is similar to a Google document that anyone can edit. It does not belong to anyone but anyone with a link can contribute to it and every time it is renewed.
Although the idea that everyone can process the blockchain may not seem secure, but it is precisely what makes the network secure and reliable. Because in order for a block of transactions to be included in the Bitcoin chain, it must be validated by the majority of miners.
Finally, the unique codes used to identify users’ wallets and transactions are large random numbers making their falsification extremely difficult. The statistics on the randomness of the blockchain verification codes required for each transaction dramatically minimizes the likelihood of a “fraudulent” transaction on the network.
How does Bitcoin work?
Nothing new so far. But knowing the function of Bitcoin requires an understanding of 2 specific concepts: mining and proof of work. They are directly related to the steps of a transaction, specifically the process or protocol used on the network of Bitcoin to verify and validate a transaction. Knowing that this protocol can vary from one cryptocurrency to another, according to the rules of the blockchain.
Bitcoin uses a system to verify transactions known as Proof of Work (PoW). In which, there are miners competing to solve complex puzzles, such as a massive Sudoku, to verify the blocks before adding them to the blockchain. This execution is called mining. The miner who achieves this is awarded an amount of BTC. In turn, all the miners together give their computing power to the Bitcoin network that gives it stability, security and decentralization. Indeed, if one miner acts maliciously, all other participants in the network will still verify the correctness of transactions.
Sure, we didn’t cover everything, but enough to get you on track. The rest will follow. And now you are in good shape to continue your journey in cryptocurrency the other cryptocurrencies! That’s right, Bitcoin is the number one cryptocurrency and the entire (cryptocurrency) market follows suit.